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Money creation in the modern economy (2014) [pdf]

bankofengland.co.uk

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Re: Money creation in the modern economy (2014) [pdf]

#61

Post by IncRnd »

andrepd wrote: post #16
rahimnathwani wrote: post #4

Some of the content is in this short video: https://www.youtube.com/watch?v=CvRAqR2pAgw Money is created by both the central bank and retail banks. When the Bank of England buys an asset, it pays in newly-created pounds. These pounds are an obligation of the central bank, i.e. a debt owed by the bank. So these pounds are 'central bank money'. When a commercial or retail bank gives you a loan, you have two accounts at…

So this begs the question: how come private banks can do this (create money + a matching liability, that is, with no interest), but private individuals can't? Why can't I, if I want to buy a car, not simply give myself 20,000€ cash and register a 20,000€ liability, which I will pay back in due course? The bank creates zero-cost virtual cash and then earns interest by loaning it as if it was real! This is already ques…

You can do this, but the car owner likely won't accept your paper as having monetary value.

Re: Money creation in the modern economy (2014) [pdf]

#62

Post by IncRnd »

majormajor wrote: post #30
andrepd wrote: post #16

Earlier quoted context omitted.

So this begs the question: how come private banks can do this (create money + a matching liability, that is, with no interest), but private individuals can't? Why can't I, if I want to buy a car, not simply give myself 20,000€ cash and register a 20,000€ liability, which I will pay back in due course? The bank creates zero-cost virtual cash and then earns interest by loaning it as if it was real! This is already ques…

It sounds like "creating money out of thin air" here more specifically means "increasing the amount of currency in circulation by exchanging it for liens or other obligations for payback." Not just printing money in a vaccum. I don't think a bank without deposits would get very far issuing loans. My understanding: The bank isn't required to hold 100% of the money you deposit in cash, though. It can lend it out up to…

> I don't think a bank without deposits would get very far issuing loans.

Really? That's what banks do now.

Re: Money creation in the modern economy (2014) [pdf]

#63

Post by jollybean »

bko wrote: post #29
aazaa wrote: post #21

From the conclusion: > This article has discussed how money is created in the modern economy. Most of the money in circulation is created, not by the printing presses of the Bank of England, but by the commercial banks themselves: banks create money whenever they lend to someone in the economy or buy an asset from consumers. And in contrast to descriptions found in some textbooks, the Bank of England does not directl…

> Budget deficits can be financed through the issuance of bonds, which look a lot like loans. But they can also be financed by just printing the money. The end result is the same, money into the pockets of people, but the implications are very different. Actually, its worse than that. The treasuries are created, sold to bank and the bank immediately sells it to the Fed for cash for a nice little profit (at least in t…

This is true but misleading because it represents a narrow aspect of what is going on. The Fed owns a small share of public debt. Social Securities, other Funds, and foreign actors own the bulk of it.

There's some very worthy reality in what you're speaking of, but it needs to be contextualized.

Re: Money creation in the modern economy (2014) [pdf]

#64

Post by [deleted] »

NovemberWhiskey wrote: post #48
luca3v wrote: post #37

Earlier quoted context omitted.

This is not exactly how fractional reserve banking works. I think that there is a misconception that if, for example, there is a bank regulation that allows 10% fractional reserve banking, then if a bank has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the bank can make $10 million in loans, with $9 million being "created out of thin hair". In fact, if a bank…

This is right, but then the house seller now has $0.9mm in cash. When she deposits it in her bank, that bank can make another loan but only for $0.81mm and so on and so on. The geometric sum to infinity ends up being 1/reserve_ratio; so if that's 10% in this example, the theoretical money creation is 10x.

[deleted]

Re: Money creation in the modern economy (2014) [pdf]

#65

Post by vkou »

n8cpdx wrote: post #57
pphysch wrote: post #53

Earlier quoted context omitted.

Key subquote: > More recently, though, with Bank Rate constrained by the effective lower bound, the Bank of England’s asset purchase programme has sought to raise the quantity of broad money in circulation. In other words: "The interest rates are already at the bottom, but we need them to be lower, so we are going to make them effectively negative through QE". The end result: the financial sector will eventually pop…

I was predicting hyperinflation from 2008 and for years after, but the evidence just isn't there. Maybe things will eventually pop. The actual happenings of the economy (people buying and selling) are insulated from financial markets enough that a huge rally can happen without affecting lived reality for people. Maybe a pop in the financial sector can happen without actually affecting the economy? I don't see why the…

I would like to point out that in order to put the economy into hyperinflation (50% month to month inflation), it would require the Fed to print and parachute somewhere between 50 and 200 trillion dollars in one year.

It's not very likely to happen.

Re: Money creation in the modern economy (2014) [pdf]

#66

Post by NovemberWhiskey »

mandelbrotwurst wrote: post #5
divbzero wrote: post #3

Earlier quoted context omitted.

I don’t think the article is outdated: US, Europe, and Japan all still use fractional reserve banking to create money. The central bank controls the base money supply using tools like open market operations or quantitative easing, but the broad money supply is some multiple of the base money supply. That multiple is determined by what fraction of deposits is lent out by commercial banks in the banking system.

The Fed actually completely eliminated the reserve requirement in March of last year (1). Unsurprisingly, this hasn't gotten a lot of attention from the corporate media. 1 - https://www.federalreserve.gov/monetarypolicy/reservereq.htm

I'd be interested to hear why you think this is newsworthy. It's not like reserve requirements were an effective monetary policy implement for the past several years - banks have been holding hugely in excess of the required reserves for a while now.

Re: Money creation in the modern economy (2014) [pdf]

#67

Post by jollybean »

n8cpdx wrote: post #57
pphysch wrote: post #53

Earlier quoted context omitted.

Key subquote: > More recently, though, with Bank Rate constrained by the effective lower bound, the Bank of England’s asset purchase programme has sought to raise the quantity of broad money in circulation. In other words: "The interest rates are already at the bottom, but we need them to be lower, so we are going to make them effectively negative through QE". The end result: the financial sector will eventually pop…

I was predicting hyperinflation from 2008 and for years after, but the evidence just isn't there. Maybe things will eventually pop. The actual happenings of the economy (people buying and selling) are insulated from financial markets enough that a huge rally can happen without affecting lived reality for people. Maybe a pop in the financial sector can happen without actually affecting the economy? I don't see why the…

"but the evidence just isn't there."

1) The average home price in Canada increased in value more than the average workers income.

Just digest that for a second: buying a home and doing nothing, is 'more productive' than literally working.

That's a devastating situation to be in.

2) Equities are valued quite highly.

3) Esp. after COVID we are now starting to see very real inflation, we're not sure how much of it is from COVID etc.

4) There's a labour shortage, partly due to workers getting support from gov. (at least in Canada) - but a huge signal of inflation.

I believe we are seeing considerable inflation of every kind except the narrow version that the economists traditionally like to use.

Things don't have to 'pop' they can just realign slow or fast, but I believe they are realigning in ways that are going to be difficult to recover from without significant change.

If you think 'raising taxes on the rich' is a controversial idea, how about 'putting a damper on home increases'.

It's the most politically toxic thing imaginable, because it's not like those 'narrow issues' like 'gun control' that hit a narrow group with an ideology - it hits the entire middle and upper class in the pocket book.

Home affordability is a fairly existential issue, and right now in Canada there's an election and not much talking about it because it's a 'no win' for most of the parties, even if they do have some policy things in the background.

So we're already in a 'Funny Money' situation thanks to Toxic Assets from 2008 on the Fed Balance sheet, QE after that, and then 'Wartime Level Debt Spending' as a result of COVID.

It's an odd time.

Re: Money creation in the modern economy (2014) [pdf]

#68

Post by vkou »

andrepd wrote: post #23
rich_sasha wrote: post #20

Earlier quoted context omitted.

Banks are regulated through the nose (in most places at most times) to make sure they don’t mess it up. The money creation is a carefully choreographed juggling act where balls can’t fall on the ground. The extra money created is effectively money someone doesn’t need right now (deposit) that can be temporarily used, and returned eventually, by someone else. When it works, it works very well, but when it doesn’t, ban…

> Banks are regulated through the nose (in most places at most times) to make sure they don’t mess it up. Eehhhhhhh........ Sounds like that isn't working out so well is it? x) With the only difference of course that if _I_ fail my obligations I don't get a taxpayer-funded bailout financed by cuts to people's salaries and pensions, instead my house gets reposessed and I go live with my kids to a homeless shelter. But…

> Eehhhhhhh........ Sounds like that isn't working out so well is it? x)

Over the past 88 years, not a single penny of FDIC-insured money has ever been lost in a bank collapse... And when a bank collapses, non-FDIC-insured money also finds a way to not evaporate. The biggest bank bust in history - Washington Mutual, with $300 billion under management collapsed in 2008. Not a penny of its depositor funds, insured or not, were lost.

Meanwhile, in the three years prior to the establishment of the FDIC, over 9000 banks collapsed, collectively losing $140 billion dollars of depositor money.

One of the most important jobs of the federal government is maintaining confidence in the banking sector, because without it, we'd all be living in a Mad Max hellscape, trading bottlecaps for ammunition.

Re: Money creation in the modern economy (2014) [pdf]

#69

Post by danielschonfeld »

The comments in this thread prove yet again that economics is a far cry from any science. Nobody really understands why this system of credit actually works as well as it does and even more troubling is what will be it's next iteration given that it's starting to crumble.

Unfortunately for most of us though it appears as though the adage that 'cash is trash' is starting to become a very real problem even in the west and necessitates that all of us transition to holding yield producing assets with risk. In other words, even grandma is an investor (aka gambler) now by force.

Re: Money creation in the modern economy (2014) [pdf]

#70

Post by IncRnd »

ubercow13 wrote: post #52
luca3v wrote: post #37

Earlier quoted context omitted.

This is not exactly how fractional reserve banking works. I think that there is a misconception that if, for example, there is a bank regulation that allows 10% fractional reserve banking, then if a bank has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the bank can make $10 million in loans, with $9 million being "created out of thin hair". In fact, if a bank…

>and it is not allowed to make any more loans. No. From the paper >In reality, neither are reserves a binding constraint on lending, nor does the central bank fix the amount of reserves that are available.

That's just randomly quoting sentences out of context. What you quoted is from the standpoint of a particular central bank, not from the standpoint of an arbitrary lending bank. Absolutely, many lending banks have reserve requirements imposed upon them, just not in the particular country of this paper!
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